How do you tackle a problem like this:
The asset beta for a company is 1.10. Division 1 had a 22% return this year; Division 2 had a 11% return. The asset beta of
industries like Division 1 is 2.0, and the asset beta of industries like Division 2 is 0.5. If the expected market risk premium is 9.2% and the risk-free rate of return is 5%, What division actually performed better? (There are no taxes).
Please see the attached file.
Please note the formula to determine the required rate of return.
Required rate of return = risk free rate + beta(market risk premium)
First, we need to compute the required rate of return for the ...
This solution is comprised of a detailed explanation to answer what division actually performed better.